‘Tax gap’ row high­lights cracks be­tween union

TORY Chan­cel­lor Philip Ham­mond’s Bud­get last week has thrown into sharp fo­cus the di­verg­ing pol­icy choices made by the UK and Scot­tish Gov­ern­ments on tax.

FOR the first 18 years of de­vo­lu­tion, MSPs had the power to vary the ba­sic rate of in­come tax, but they never took ad­van­tage of the op­por­tu­nity.

Rais­ing a rate paid by around two mil­lions tax­pay­ers in Scot­land was not po­lit­i­cally at­trac­tive as it ap­plied to work­ers on mod­est means.

As a re­sult of the Smith Com­mis­sion, set up in the wake of the in­de­pen­dence ref­er­en­dum, Holy­rood was given full con­trol of in­come tax rates and bands, with the ex­cep­tion of the tax-free per­sonal al­lowance

The two Bud­gets last year – Mr Ham­mond’s in West­min­ster, and SNP Fi­nance Sec­re­tary’s Derek Mackay’s state­ment in Ed­in­burgh – showed that the Scot­tish and UK Gov­ern­ments had a dif­fer­ent phi­los­o­phy on in­come tax.

Mackay in­tro­duced a new 19p starter rate for low earn­ers, while at the same time adding a penny on to the 20p, 40p and 45p rates. Ham­mond kept the three UK rates un­changed. His Tory col­leagues at Holy­rood ac­cused the SNP of jack­ing up taxes.

But it is a dif­fer­ent tax change that has dom­i­nated Holy­rood this week and given rise to con­cerns of a tal­ent brain drain from Scot­land.

In try­ing to make progress to­wards meet­ing a Tory man­i­festo prom­ise, Ham­mond last year raised the level at which tax­pay­ers were li­able for the 40p “higher” rate of in­come tax – from £45,000 to

£46,350. The pol­icy was ex­plic­itly aimed at re­duc­ing the tax bills of mid­dle-in­come vot­ers.

Mackay, by con­trast, only in­creased the higher rate thresh­old to £43,340, which meant tax­pay­ers in Scot­land would pay a big­ger chunk of their in­come – nearly £3,000 – at the 41p level. The gap widened when Ham­mond raised the thresh­old from £46,350 to £50,000 last week. If the SNP Gov­ern­ment main­tains the al­lowance at £43,340 in its De­cem­ber Bud­get, work­ers earn­ing £50,000 in Scot­land will pay over £1,100 more in tax than their coun­ter­parts south of the Border.

Ed­u­ca­tion Sec­re­tary John Swin­ney was in­formed last week that the tax gap could harm head­teacher re­cruit­ment, but will the di­ver­gence lead to high­er­in­come earn­ers leav­ing Scot­land?

Cha­ran­deep Singh, head of ex­ter­nal re­la­tions at Scot­tish Cham­bers of Com­merce, said it is crit­i­cal that Scot­tish busi­nesses are “able to at­tract and re­tain world-class tal­ent”.

But while his or­gan­i­sa­tion re­mained “alert” to tax changes which could have the “po­ten­tial to fur­ther ex­ac­er­bate the chal­lenge of re­cruit­ing and re­tain­ing staff”, he did not pre­dict a brain drain.

David Watt at the In­sti­tute of Direc­tors also took a bal­anced ap­proach. He said the IoD has a “real con­cern” about how higher earn­ers are treated and added that politi­cians should be aware of the “risk of be­havioural change” if peo­ple per­ceive they are pay­ing “more than than their fair share of the pot”. How­ever, he also said: “The other big point

for the IoD is how the tax take is spent and if it is con­sid­ered to be wisely [spent] then there may be some sup­port for in­creases in tax­a­tion.”

Colin Bor­land, di­rec­tor of de­volved na­tions at the Fed­er­a­tion of Small Busi­nesses, said that for most small busi­ness own­ers be­ing caught out by where the higher rate of in­come tax kicks in “is a prob­lem they aspire to have”. He ex­plained: “Un­der a quar­ter of them are higher rate tax­pay­ers [23 per cent]. About two-thirds [65 per cent] are ba­sic rate tax­pay­ers and only 1.6 per cent pay the ad­di­tional rate. So, their con­cerns about ris­ing taxes aren’t so much about their own pock­ets, as their cus­tomers’ and the ef­fects on the wider econ­omy.”

Dr Lewis Mor­ri­son, chair of BMA Scot­land, which rep­re­sents doc­tors, said it is for gov­ern­ments across the UK to make tax de­ci­sions that re­flect the pri­or­i­ties of the pub­lic.

Rather than cit­ing in­come tax changes, he said years of “real terms pay cuts” was the is­sue for doc­tors: “Our pri­or­ity would be the re­ver­sal of this trend and a pay and re­ward pack­age – in­clud­ing pen­sion con­tri­bu­tion ar­range­ments – en­sur­ing Scot­land is able to re­cruit and re­tain doc­tors it needs.”

And Tracy Black at CBI Scot­land spoke in gen­eral terms about the dif­fer­ing tax poli­cies.

She said com­pet­i­tive­ness re­quired a “full of suite of in­ter­ven­tions” and urged Scot­land to de­velop its work­force, de­liver first-class in­fra­struc­ture and in­vest in R&D. She added that lo­cal busi­nesses will be “wary” of any moves that “widen di­ver­gence be­tween Scot­land and the rest of the UK” as the firms will fear it could make the coun­try less at­trac­tive to in­vestors and tal­ent.

The tax gap row will rum­ble on into Mackay’s Bud­get and will give the Tories am­mu­ni­tion to fire at the SNP at the next Holy­rood elec­tion. But the groups who rep­re­sent some of the tax­pay­ers af­fected by the change, while ex­press­ing con­cern, of­fer a less alarmist anal­y­sis than some of the politi­cians.

SNP Fi­nance Sec­re­tary Derek Mackay in­tro­duced a new 19p starter rate for low earn­ers and a penny on to the 20p, 40p and 45p rates - yet Philip Ham­mond kept the three UK rates un­changed